Regulators finalize Volcker Rule fix

Financial regulators signed off on a Volcker Rule carve-out for a particular type of security often used by small banks.

The Commodity Futures Trading Commission (CFTC) announced Tuesday that regulators had finalized an interim rule that would exempt financial institutions holding collateralized debt obligations containing so-called “trust preferred securities,” or TruPS, from the new Dodd-Frank requirement.

The new rule comes just weeks after regulators finalized a multi-year effort to implement the Volcker Rule, after the industry and lawmakers warned smaller banks not intended to be targeted by the new provision could suffer heavy losses without a fix.

“The Commission believed it was important to join the other agencies in ensuring community banks are protected, as Congress directed, from restrictions in the Volcker Rule intended to lower the risk of large financial institutions,” said Mark Wetjen, acting chairman of the CFTC.

The Volcker Rule is a centerpiece of the financial overhaul and cracks down on banks making risky trades in the pursuit of profit. But the financial industry cried foul after the rule was finalized in December, arguing that as written, the rule could force smaller banks to suffer heavy losses due to holding those sorts of investments. The American Bankers Association threatened legal action if regulators failed to address the matter. Regulators had said they would address the matter by Jan. 15.

In the interim rule, regulators will exempt CDOs contained TruPS that were created before May 19, 2010. Furthermore, the bank seeking the exemption must have invested in the security on or before Dec. 10, 2013 – the date regulators finalized Volcker Rule regulations.

Regulators also released a “non-exclusive” list of issues that meet the requirements of the new interim rule.

The controversy over the TruPs issue had attracted attention from both parties on Capitol Hill. House Republicans unveiled legislation to address the matter, while their Democratic counterparts urged regulators to fix the matter. A bipartisan bill was also introduced in the Senate.